Traders re-position for potentially dovish Fed tomorrow

Summary

• USDCAD: Broad USD selling is the theme again this morning as traders re-position for potential dovish commentary from the Fed tomorrow.  Dollar/CAD continues to hold up though, as yesterday’s fall in crude prices back below the $51 level ignited another wave of oil selling that continues into today.  President Trump tweeted again overnight and took another swing at the Fed and its plan to hike interest rates again tomorrow.  US Housing Starts for November were just announced 1256k vs 1228k expected, and Canadian manufacturing sales for October were just reported -0.1% MoM vs +0.4% expected.  We think USDCAD could inch higher still so long as the market stays above the 1.3390s and oil stays offered.  The next chart resistance level resides in the 1.3430s.

• EURUSD: Euro/dollar is galloping higher today after the market closed near its daily highs yesterday.  This allowed for an attack on chart resistance in the 1.1350s during Asian trade overnight, and when we saw broad USD selling enter the fray in Europe, this level gave way to yet another rally.  Call it repositioning or short covering ahead of a dovish Fed, but this is what’s making the rounds now on newswires.  Germany’s IFO survey for December missed expectations today, but traders shrugged it off.  We think EURUSD now stalls ahead of the Fed meeting tomorrow.  As mentioned yesterday, we believe the 1.1380s is a key level for the fund short position at this point.  Stay below, which the market is still managing to do on a closing basis, and they’ll feel comfortable; but close above and we could be in for a shift in trend to the upside.

• GBPUSD: Sterling is also rallying higher this morning as traders try to front-run Powell ahead of tomorrow’s expected 25bp rate hike.   The market has broken above the 1.2650-80 resistance zone we mentioned yesterday, but like EURUSD, it’s starting to stall now as well.  The EURGBP cross has seen some swift selling this morning, after being higher earlier.  The potential bearish outside day that is now forming on the cross tells us to be on guard for some positive Brexit headlines.  The UK reports its November CPI early tomorrow morning, with traders expecting +0.2% MoM and +1.8% YoY. 

• AUDUSD: The Aussie is trading marginally higher today, but it continues to lag its G7 peers because of the recent declines in equity and copper prices.  This morning’s price action is now focused on chart resistance in the 0.7190-0.7200 area as traders prepare for the Fed meeting tomorrow.  We think the shorts will remain comfortable below this level, but may run for cover should we close above.

• USDJPY: The USD longs continue to take losses here as the rout in USDJPY enters its third day.  The S&Ps have bounced off their lows from yesterday, but the US 10-yr yield still looks like it wants to attack 2.80.  What is more, we have a broader FX trade that is front-running the Fed potentially changing course with its forward guidance tomorrow.  We would wager that the fund long liquidation that we saw last week (as per the CFTC COT report) is continuing big time this week.  We think USDJPY could bounce here if we consider the prospects of EURUSD and GBPUSD settling back ahead of the Fed, but we think sellers (those who didn’t get out) will lurk in the 112.60-80s.  

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Charts: TWS Workspace

About the Author

Erik Bregar - Director, FX Trading

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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